Rooted in preserving market integrity, the concept of insider trading emerged and has been ingrained in the context of the securities markets. Despite the well-understood nature of the subject-matter of insider trading, a question recently arose on whether the offence can be extended to the purchase and sale of land. In Chekka Guru Murali Mohan v. The State of Andhra Pradesh (decided 19 January 2021), a single judge of the Andhra Pradesh High Court squarely answered the question by limiting claims of insider trading only to the securities market, and declined the invitation to apply similar concepts where the subject matter of trading is land. For reasons discussed below, this is not at all a surprising outcome.
Facts and Ruling
The above case arose on account of a complaint filed by an individual pertaining to the Andhra Pradesh Capital Region Development Authority Act, 2014 introduced by the former chief minister, Mr. Chandra Babu Naidu, through which certain areas of land were declared to be the capital region of the then newly constituted state. The allegation was that several persons became aware of the location of the capital region even before the information was widely disseminated, and such privileged possessors purchased land in the region for a paltry sum beforehand and earned handsome profits as a result. The complainant claimed that government officials and political leaders who were privy to this sensitive information divulged them to their kith and kin who acquired lands from farmers in the region at undervalue. The complaint was filed under sections 420, 409, 406 and 120-B of the Indian Penal Code (IPC), and the accused persons moved the High Court under section 482 of the Criminal Procedure Code (CrPC) to quash the complaint.
This much is understandable, as the trajectory followed is not atypical to such cases. The intrigue arose when the State and the prosecution invoked insider trading claims to embellish their charges under the IPC. As the judge noted:
“This a very peculiar and very interesting case and in fact a case of first of its kind where the prosecution seeks to criminalize private sale transactions entered into between the petitioners as buyers of the land and the sellers of the land long back about six years ago by invoking the concept/theory of offence of insider trading applying the same relatively to the facts of the case, primarily on the ground that the petitioners as buyers of the land did not disclose to the owners of the land that the capital city is going to be located in the said area and thereby concealed the said material fact and cheated the owners of the land and on the ground that as the location of the capital was officially declared subsequently that there is a phenomenal increase in the value of the land and the owners of the land sustained loss on account of concealment of the said fact.”
The question, therefore, is whether the buyers of the land had an obligation to disclose to the sellers the information the buyers possessed that the land would become part of the capital region and whether, for failure to do so, they can be said to have indulged in insider trading. In analysing the issue, the Court delved into the history and objective of insider trading law in India, as enshrined in the Securities and Exchange Board of India Act, 1992 (SEBI Act) and the relevant regulations thereunder. It also drew strands from comparative experience in jurisdictions such as the United States and the United Kingdom. All of these clearly left only one conclusion: that “the said offence of insider trading is essentially an offence relating to trading of public company stocks or other securities such as bonds or stock options based on material, nonpublic information about the company.” The sale and purchase of land were completely alien to the concept of insider trading. This was also clear from the provisions of the SEBI Act (sections 12-A and 15-G), which reference “securities” of a company.
The Court stalled the attempt of the prosecution to read into and import the provisions of the SEBI Act relating to insider trading while dealing with an offence under the IPC. It noted that “the offence of insider trading is totally alien to our criminal law under IPC. It is a concept or offence totally unknown to our criminal law under Indian Penal Code”. The Court was categorical in its conclusion not to apply the concept of insider trading in such circumstances, given that was never the parliamentary intent as it clear from both the SEBI Act as well as the IPC. Ultimately, the Court rejected the charges under the IPC regardless of the insider trading argument.
Comments
The outcome in on the insider trading issue could not have been any other way. Insider trading is well-entrenched in securities regulation, and the historical evolution too establishes its close linkages with the securities markets. That is consistent with the position in India law whereby the concept does not extend to other forms of property such as real estate. Even within the domain of securities regulation, the bite of insider trading lies on “marketable” securities, and not private untraded securities. Among other things such as the definition of “securities” under the Securities Contracts (Regulation) Act, 1956, this is also evident from the fact that while insider trading had somehow wound its way into the Companies Act, 2013 (applicable to both listed and unlisted companies) by virtue of section 1956 of that legislation, it was subsequently eliminated by way of the Companies (Amendment) Act, 2017. This suggests that even in the context of corporate securities, the element of marketability is essential, thereby limiting the operation of insider trading to a very narrow sphere.
The decision in Chekka Guru Murali Mohan also raises another interesting issue, namely the nature and content of the inside information that was allegedly unpublished and price sensitive. That relates to prospective government decisions or policy changes such as, in this case, the announcement regarding the location of a new capital region. Political functionaries and government officials are often privy to that information before it is released into the public domain. Conventional insider trading regulation may not easily ensnare such conduct as the information does not relate to the company whose securities are traded, but to a more generally policy change. The United States has sought to address this gap through the Stop Trading on Congressional Knowledge Act (STOCK Act) enacted in 2021, which too though applies in the context of securities.
Despite the rather clear and unavoidable outcome based on the current law, the issues before the Andhra High Court raise some interesting policy-level questions, whether: (i) there is merit in consideration the application of insider trading-type principles to property other than securities, such as for real estate that can be subject to market fluctuations; and (ii) insider trading issues must be extended beyond corporate insiders to legislators and policymakers on the lines of the STOCK Act.
